Mr. Putin’s Billion-Dollar Palace

2 March 2011

The scope of corruption in Vladimir Putin’s Russia has been much discussed, documented in expert reports and quantified in international ratings. Transparency International estimates the country’s annual corruption market at $300 billion; its Corruption Perception Index placed Russia in 154th place, behind Congo and Libya. As economist Anders Ǻslund has noted, there is only one country in the world that is both richer (in terms of GDP per capita) and more corrupt than Mr. Putin’s Russia — and that is Equatorial Guinea. Yet despite many suspicions, Mr. Putin himself has not been openly named in relation to a specific scheme — until now.

St. Petersburg entrepreneur Sergei Kolesnikov has always steered clear of politics. His business was in medical supplies. In 1992 Mr. Kolesnikov cofounded a company named Petromed for investing in healthcare projects. A second cofounder was the St. Petersburg Committee for External Relations, headed by a little-known city bureaucrat by the name of Vladimir Putin. What follows is an account by Mr. Kolesnikov. In 2000, after Mr. Putin assumed the presidency of Russia, his associate, Nikolai Shamalov, approached Mr. Kolesnikov with a business proposal: Petromed would receive lucrative contracts on the condition that 35 percent of the contracted sums would be transferred to foreign bank accounts. This money was to be used for various investment projects. In 2005 — again, at the urging of Mr. Shamalov — Mr. Kolesnikov founded a new company, Rosinvest, for managing these projects, ranging from construction to shipbuilding and wood processing. Mr. Kolesnikov was let to understand that the company’s business was conducted in the interests of Vladimir Putin.

It was in the same year, 2005, that Rosinvest launched a construction project for a vacation complex on the Black Sea coast, near Praskoveevka village in the picturesque Krasnodar region. Two years later, another project — this time for an elite vineyard and winery — was added. Both developments were unified under the title “Project South.” With the onset of the financial crisis, as companies, including those under Rosinvest, were forced to conduct layoffs, Mr. Shamalov communicated the orders from Mr. Putin: freeze other projects, and direct all funds to “Project South”. When Sergei Kolesnikov last saw financial documents relating to the project in October 2009, its cost had reached US$1 billion. What was supposed to be a vacation complex tuned into a lavish Italian-style palazzo complete with a casino, an amphitheatre, swimming pools, tea houses, landscape parks, heliports, and a sports complex. On paper, the seaside residence, constructed under the guidance of Italian architect Lanfranco Cirillo, belongs to Mr. Shamalov, but Mr. Kolesnikov is adamant: the real owner of the $1 billion palace is Prime Minister Vladimir Putin.

This information was presented in a letter to President Dmitri Medvedev that Mr. Kolesnikov published in December. Last week, Russia’s newest whistleblower gave his first television interview to RTVI. I met him near our office in downtown Washington, DC, where we spoke, on camera, for about half an hour. Mr. Kolesnikov explained his motive for revealing the story: “Russians have a right to know the moral standards of our leader who thinks it possible to build such palaces when there is no money for surgeries for children, when the state has so many problems.” Since publishing his letter, Mr. Kolesnikov has not been back to Russia; he says he has no intention of “conducting experiments on himself.”

“I am sometimes asked: do you have any written papers with Putin’s signature and so on,” Mr. Kolesnikov continued, “I simply want to say that Vladimir Vladimirovich is a very professional and trained person, trained not to leave any traces. And so, of course, there are no papers, and there can be none. But there are a number of factors that can definitely indicate that this is not a private residence.” Mr. Kolesnikov named two such indications: the building of the palace is conducted by the Federal Agency for Special Construction and overseen by the Federal Protective Service — both of them government departments. A third indication was provided by Russia’s Novaya Gazeta newspaper, which published a document, dated November 10, 2008, transferring the ownership rights to Mr. Shamalov’s company. The document was signed by Vladimir Kozhin, head of the Presidential Property Management Department of the Russian Federation.

Russia’s television networks have remained silent about Mr. Kolesnikov’s revelations, but thanks to the growing reach of the Internet, millions of Russians have not only read about the palace, but have seen its photographs — courtesy of the Russian equivalent of WikiLeaks. The regime may be guilty of worse offenses — such as the order to shoot at the Beslan school during the 2004 hostage crisis — but the Black Sea palace, thanks to its sheer shamelessness and blatancy, may just become one of the last straws for Mr. Putin’s rule. After all, it was the public indignation with perks and “privileges” enjoyed by the party nomenklatura that provided a major impetus for the rise of Russia’s pro-democracy movement in the late 1980s.